Xinyi Energy Earnings: Change in Dividend Policy a Negative Surprise to Investors

Xinyi Energy’s 03868 first-half 2023 net profit of HKD 566.9 million, down 9.0% year on year, was below expectations. We believe the miss is mainly attributable to the depreciation of the Chinese yuan and more conservative assumptions on tariff adjustment. We cut our fair value estimate to HKD 2.64 from HKD 3.12 after updating our model assumptions. While the firm remains undervalued, we think share price performance will be weak in the near term, given negative investor sentiment after the disappointing change in the dividend policy.

Previously, Xinyi Energy aimed to distribute not less than 90% of its distributable income annually, which positioned it as a high dividend payer. However, it has changed its dividend policy, and now takes into account the firm’s financial resources and funding needs. As a result, interim dividend per share dropped 55.8% year on year to HKD 0.034 (49% payout ratio). Management explains that the change is necessary given the current high interest-rate environment, uncertainty in the collection of subsidy payments, and the funding needs for ongoing expansion plans. The firm did not receive any subsidy payment in the first half of 2023. In our view, this is strategically prudent, and we think the change should bring long-term benefits as the firm can focus on investing in projects that will improve shareholder returns. We expect the firm to pay out 50% of earnings during 2023-25, before gradually rising to 65% by 2027.

On a positive note, the declining solar module prices have led to increasing returns for solar farm projects. As a result, the firm should be able to achieve its plan to acquire 700 megawatts-1,000 megawatts in 2023. We forecast Xinyi Energy’s capacity to grow at a CAGR of 19.7% through 2022-27, supported by its sound balance sheet, with a net gearing ratio of 35% as of end-June 2023. The change in dividend policy should also free up more resources for the firm.